Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to account for its investment. Compute the gain or loss on the intra-entity sale of land.
A) $15,000 loss.
B) $15,000 gain.
C) $50,000 loss.
D) $50,000 gain.
E) $65,000 gain.

Question

Quizplus · Accepted Answer

The initial cost of the land to Leo was $60,000, and Stiller purchased it for $75,000, resulting in a gain for Leo of $15,000 ($75,000 - $60,000). Since Stiller is 80% owned by Leo, Leo's equity in the gain is $12,000 ($15,000 x 0.80). However, since Leo uses the equity method, the gain is not recognized until Stiller resells the land to an outside party. Therefore, there is no gain or loss to be recognized on the intra-entity sale of land between Leo and Stiller.

Stiller Company, an 80% Owned Subsidiary of Leo Company, Purchased